Friday, 6 September 2013

Good Culture and Return On Investment

There has been a lot in the press and blogosphere recently about how its people that matter in providing a competitive advantage to a business. In a recent discussion with a number of high growth companies, whilst there was a general acceptance that people and more specifically Culture mattered; there was a mixture of both skepticism and confusion about how one might quantify the benefits.

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I went away to think about how I could use simple recognisable examples to demonstrate the economic value of "good" culture over a "bad" culture. Lets take two examples. The first is a company which might be described as having a bad culture or perhaps a culture where the employees don't feel engaged or committed to the business. I expect we can all recognise similar companies.In this business employees turn up for work between 8 and 9 am but do not voluntarily start their work and continue to read their newspapers or use their smartphones until 9am. During the working day they stick religiously to the rules having 15 mins break in the morning and having their 1 hour lunch break. At the end of the day to make sure they can leave at 5pm exactly, consequently work winds down around 4:45 and everything is put away, necessary ablutions done in time for a mass exit at 5pm.In the second business where they have a "good" culture staff arrive between 8 and 9am and mostly start their working day when they arrive, whilst everyone takes a lunch break many can be found back at their desks working resulting in them having substantially less than the mandatory hour. When 5pm arrives most of the staff are still working and they gradually drift away from work over the next hour.So its easy to see that on average people in the company with a "good" culture or where they are engaged with the organisation work longer. For the sake of this example lets assume that on average the "good" culture business get 30 minutes more per day per employee than the business with a "bad" culture. Based on my everyday example I don't think that's an unreasonable estimate to make.Over a week that's 2.5 hours per employee on the basis that an employee works 46 weeks a year, excluding holiday entitlement and public holidays, that equates to 115 hours per employee per year or if you prefer about 16.5 days. For a company with 10 employees that's 165 extra free days work or 33 man weeks. That about 3/4 of a full time employee every year for a 50 man company that's 3.5 man years of effort extra.So what does that mean in financial terms. That's a bit more difficult to quantify because were are going to have to make some assumptions about average pay across the business. Using composite rate of £10 an hour, which I suspect is a little conservative but makes the maths easier, we get an economic benefit of about £1150 per employee per year. For our 10 man company that £11500 per year. For our 50 man company that's £57500 comfortably more than a couple of employees. If we assume the businesses are in aerospace, IT or other high skilled industries the financial benefit increases dramatically because the average hourly rate is probably closer to £25 than £10.So what have we discovered? Firstly I would say small differences matter 30 minutes a day isn't much spread across employees but it adds up to a significant extra saving and competitive edge. Secondly, in keeping this example as simple as possible we have ignored a number of other benefits including the fact that people work harder and more effectively when they are happy at work. They don't "clock watch", they operate better as a team. All these additional factors increase productivity and performance. They are however very difficult to quantify and certainly not without an organised an scientific study which is way beyond my capabilities. Nevertheless I think it has been possible to demonstrate clearly that there is a quantifiable benefit to having a "good" culture and even on this anecdotal basis its financial benefits are not to be ignored.